Supply Concerns Spur Oil Futures Rally, WTI Spreads Spike

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and the Intercontinental Exchange Brent contract rallied Wednesday following a reported drawdown in U.S. crude stocks, ignoring an ongoing advance in the dollar further bolstered by strength in the U.S. economy, while some observers see the Chinese economy stabilizing after a summer slowdown.

November West Texas Intermediate surged $3.29 on the session to a $93.68 bbl settlement, paring an advance to a $94.17 13-month high on the spot continuous chart reached intrasession after the Energy Information Administration reported the seventh consecutive weekly drawdown in crude stocks at the Cushing tank farm in Oklahoma.

Inventory at Cushing is down 49% from a 2023 high of 43.244 million bbl reached in late June to 21.958 million bbl on Sept. 22, with the stock level nearing a point that can cause operational issues. Estimates suggest operational constraints at the WTI delivery point can occur when stocks fall between 16 and 22 million bbl. The inventory drawdown at Cushing spiked an already wide six-month WTI calendar spread, which surged $2.24 on the session to $10.09 bbl -- the widest backwardation since mid-July 2022.

U.S. commercial crude stocks fell 2.2 million bbl to 416.287 million bbl in the third week of September, with 943,000 bbl of the draw at Cushing, pressing inventory to a 15-month low, while 15.5 million bbl or 3.6% below the five-year average. Strong export flow amid supply constraints by OPEC+, including an additional 1 million bpd cut in production by Saudi Arabia and pledge by Russia to withhold 300,000 bpd of oil exports through the end of the fourth quarter, has amplified demand by foreign buyers for U.S. crude. EIA data shows U.S. crude exports for the four-week period ended Sept. 22 averaged 4.275 million bpd, 491,000 bpd or 13% above the comparable four weeks in 2022.

Bank of America Research in a note to clients on Tuesday said it lifted its price projection for Brent crude for the fourth quarter to $96 bbl on the production cuts by OPEC+, recent gains in refining margins, and expanding economic stimulus in China.

"[W]e expect global oil stocks to decline by 70mm over the coming 3 months," said Bank of America Research.

ICE November Brent futures settled at $96.55 bbl Wednesday, up $2.59 on the session, trimming an advance to a $97.06 better-than 10-month high on the spot continuation chart. November Brent widened its premium against the December contract by $0.66 to $2.19 bbl, with the six-month calendar spread settling at $8.87 bbl.

NYMEX October ULSD futures rallied $0.0909 to a $3.3147 gallon settlement following three down sessions, with the November contract ending the session at $3.2621 gallon in the backwardated market. October RBOB futures gained by a smaller $0.0364 to $2.5986 gallon at settlement, widening a premium to the November contract to $0.0485 gallon ahead of expiration on Friday.

"The recent run up in crude oil and the high sustained margins in gasoline have left wholesale NYMEX RBOB (gasoline) prices at the highest seasonal levels in a decade going into winter, a relatively rare event given winter gasoline's higher Reid vapor pressure and thus lower costs economics," said Bank of America Research. "Meanwhile, turbocharged by a run up in crude oil prices and low inventories, diesel prices have raced to match last year's exceptionally high levels despite the growing downside demand pressures on the industrial and manufacturing side."

Oil futures rallied despite a strengthening U.S. dollar, which settled at a 106.366 10-month high, gaining 0.4% in index trading against a basket of foreign currencies. In addition to high interest rates which are expected to remain elevated throughout 2024, U.S. economic growth remains resilient compared with a sluggish Eurozone economy and summer slowdown in China.

Wednesday morning, the U.S. Census Bureau reported a 0.2% increase in U.S. durable goods orders in August from a downwardly revised July estimate of 5.6% and expectations for a 0.3% monthly decline. Machinery led the advance in new orders, and transportation equipment led increases in shipments, unfilled orders, and inventories. On Thursday, the Bureau of Economic Analysis will release its third and final estimate for annualized U.S. gross domestic product growth in the second quarter, which is expected to be bumped up from 2.1% to 2.3%. The Atlanta Federal Reserve's GDPNow indicator suggests U.S. GDP in the third quarter would grow at a 4.9% annualized rate.

Meanwhile, "China's economy has recently shown some signs of stabilization, and the government still has many policy levers to pull," said Frank Carroll and Janet Wang, portfolio managers for emerging markets with Oaktree Capital Management on Tuesday.

They note Beijing hasn't provided large fiscal or monetary stimulus as it has in the past, instead choosing targeted measures, including modest interest rate cuts, reduced restrictions on property buying, and policies to help lower local government debt.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne